RBI panel to review banks' loan pricing system

11 June 2009

The Reserve Bank of India has set up a working group to review the current system that banks use for pricing loans in order that the interest rates truly reflect the monetary policy.

Banks in India used to benchmark their lending to prime lending rates. But, over the years, the base prime lending rates have lost their relevance as banks have started lending to customers below the prime rates.

The concept of Benchmark Prime Lending Rate (BPLR) was introduced in November 2003 for pricing of loans by commercial banks with the objective of enhancing transparency in the pricing of their loan products.

''Over time, the system of BPLR has evolved in such a manner that it has lost its relevance as a meaningful reference rate as bulk of loans are advanced below BPLR. Furthermore, this impedes the smooth transmission of monetary signals and makes the loan pricing system non-transparent,'' RBI had said in its annual policy statement 2009-10, released in April 2009.

''Accordingly, in order to review the present BPLR system and suggest changes to make credit pricing more transparent, the policy proposed constitution of a working group on Benchmark Prime Lending Rate,'' RBI said in a release.

The working group chaired by Deepak Mohanty, executive director of the RBI, has representations from the concerned departments of the Reserve Bank, Indian Banks' Association, Banking Codes and Standards Board of India, and public, private and foreign banks as also experts from outside.